Bush's Accounts Offer No Solution

The Colorado Freedom Report:  An independent journal of politics and culture.

The Colorado Freedom Report--www.FreeColorado.com

Bush's Accounts Offer No Solution

By Ari Armstrong

This article originally appeared in the Sunday, December 26, 2004, edition of The Denver Post, page 1E.

Cut benefits or raise taxes. Those seem to be the painful options Social Security demands. The basic problem is understood by all sides: In coming decades, the number of retirees taking benefits will increase relative to the number of workers paying the tax.

Unfortunately, few offer sensible reform. The Democrats merely want to tweak the system that imposes a high burden on America's working poor and middle class. President George Bush's plan to replace part of Social Security with accounts mandated and regulated by the federal government is unnecessary for reform and contrary to free markets.

Estimates of the unfunded promises over the next century range widely - all in the trillions. These estimates depend on predicting economic trends over decades - and whether the so-called "trust fund" should be taken seriously. Currently the Social Security tax of a combined 12.4 percent on all income up to $87,900 takes in more money than is paid out in benefits.

Where does this extra money go? It buys government bonds, which means the money goes to pay for other government programs. The only way these bonds can be paid back in the future is to raise general taxes.

Bush wants to divert a portion of the Social Security tax to mandatory, regulated accounts. A worker would pay less into Social Security and receive fewer benefits from the main program. The expectation is that proceeds from the accounts would at least make up the difference in lost benefits.

But the mandated accounts are superfluous. Workers could as well be allowed to keep that money and do with it what they wish. Some would spend it on consumption; some would invest it in the stock market; others would purchase real estate or gold or whatever suited them. The point is, individuals who earn money should have the liberty to decide how to spend that money. It's not the proper function of the federal government to dictate how we spend our money and plan for retirement.

Though the details are fuzzy, Bush has indicated he would accept some combination of future tax increases (through deficit spending) and cuts in promised benefits to accompany the transition to accounts. Bush has ruled out increasing the Social Security tax rate. Fred Barnes suggests in The Weekly Standard that the Republican plan is likely to reduce the growth of benefits. Right now, benefits grow with real wages, faster than inflation. Barnes notes this is expected to produce benefit levels 40 percent greater in 2050. Benefits could instead be set to rise only with inflation.

However, cuts in promised benefits can be achieved without the mandated accounts. Benefits could be cut just enough to avoid tax increases for young and future workers, or benefits could be cut enough to allow a reduction of the Social Security tax. Bush's accounts contribute nothing to real reform.

If retirees and those close to retirement don't like the idea of cutting promised benefits, do they prefer the alternative of imposing massive tax hikes on their children and grandchildren?

The Social Security tax is regressive, meaning that the poor pay a greater percent of their income to the tax than the rich do. Taking 12.4 percent of the income of the working poor and middle class is a horrible burden. True enough, once people retire they can receive benefits - and this is true also for the rich. However, far better would be to allow the working poor and middle class to keep more of their income to spend or invest as they see fit.

Social Security could be phased out by steadily increasing the age at which benefits are paid or by incrementally reducing benefits. At least the growth of benefits should be held to the rate of inflation. A better reform - though one short of completely phasing out the system - is to slowly means-test benefits so that eventually only the poor receive them.

Unfortunately, the left won't consider reducing Social Security to an anti-poverty program, and Bush wants to replace Social Security with a centrally planned retirement scheme. Neither side is interested in letting workers keep more of their money to spend or invest in a market free from federal controls.

Ari Armstrong is editor of FreeColorado.com.

For additional analysis, please see Social Security: Collected links.

The Colorado Freedom Report--www.FreeColorado.com